Columbia University Medical Center

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Columbia University Medical Center

• Training Certification Program For Senior
  Financial Administrators - Session 2

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Session 2 Fundamentals of Budgeting

• Part 1 Budgeting Basics
• Part 2 Types of Budgets
• Part 3 Overview CUMC Integrated Planning
  Approach
• Part 4 Developing Budgeting Metrics
• Part 5 Multi-year Financial Planning
• Part 6 Capital Planning and Budgeting
• Part 7 Capital Assets and Depreciation

Session 2 - Budgeting
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Agenda
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Session Objectives

• Understand budgets and why they are so important
• Provide an overview of types of budgets
• Understand key roles and responsibilities in the
  budget process
• Understand all funds budgeting
• Understand how individual budget submissions
  rollup to overall at CUMC and University level
• Understand how budgeting performance metrics
  relate to the annual budget
• Understand strategic, long-term planning
• Understand the methodology for planning and
  budgeting of capital
• Understand how assets are capitalized and
  depreciated

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Part 1

• Budgeting Basics

Session 2 - Budgeting
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Historical CUMC Perspective

• The Budget process at CUMC was fragmented and
  inconsistent
• Each School had its own internal budget process
• Budgeting system was not linked to financial
  statements
• Budget was not included in FAS at the account
  level
• Need for better financial monitoring of all funds
• Difficult to see the consolidated CUMC financial
  picture

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Current CUMC Perspective

• Implementation across University of all funds
  budgeting started in FY03/04
• Budgeting tool allowed departments to build a
  bottom up all funds budget, beginning at the
  (ten digit) account level
• The budget tool allowed direct import of budget
  information into the FAS system
• All funds budgeting provides better monitoring of
  results and available resources
• Both unrestricted and restricted accounts are
  budgeted
• Evolving process

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What is a Budget?

• A budget is a plan for projecting the achievement
  of an organizations goals
• It is a plan of action for receiving and spending
  money within a specific period of time
• Budgets record the realistic goals and objectives
  of the organization.
• Expectations for achieving goals are based on
  past experience, current information and
  assumptions about the future
• Serves as a tool to ensure that financial
  exposure of the organization are anticipated

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Why Is It Important?
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What Resources Drive the Program?

• Number and type of students
• Number of procedures
• Payor mix
• Managed care plans
• Health insurance plans
• Medicare
• Medicaid
• Self Pay
• Indigent
• Philanthropic Activities
• Space

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What Resources Drive the Program? (contd)

• Sponsored Research Mix
• Government NIH awards
• Government NSF awards
• Government DOD contracts
• Government training awards
• Foundation awards
• State grants and contracts
• FA Cost Recovery
• Innovative cutting edge programs vs.
  traditional ones
• Seasonality
• Cyclical - cash coming in

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Best Practices Overall Framework

• Strategic Planning
• Vision for the Future
• Strategic Goals and Objectives
• Programmatic initiatives

• Financial / Tactical Plan
• Financial Plan of action for achieving goals
• Profit Loss/ Cash Flow Impact of investing in
  new recruits, facilities, equipment, I/T, etc.
• Departmental Business Plans (Programmatic
  Financial Goals)

• Accountability
• Performance vs. Goals
• Strategic financial goals
• Dept -gt Division -gt Investigator
• Faculty Compensation Plan
• Resource Re-allocation
• Internal Funds
• Space

• Annual Budget
• Operationalize strategy through the annual budget
  process
• Setting priorities when aligning resources to
  achieve goals
• Mission-based / All Funds Budget

• Performance Management
• Measurable Goals
• Key Performance Indicators
• Balanced Scorecards
• Accuracy Systems/ Data Management

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Part 2

• Types of Budgets
• Unrestricted Fund
• Incremental
• Zero-Base
• Mission Base

Session 2 - Budgeting
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Unrestricted Fund Budgeting

• Unrestricted Income 1-XXXXX
• ICR
• Tuition and fees
• State aid
• Unrestricted Expenses 2-XXXXX
• Deans central funds
• Academic program / Departmental administration
• Operation of Central Administration support
• University common costs
• Debt service
• All other funds not budgeted and loosely monitored

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Incremental Budget Process

• Analysis of various market driven indices
• Market basket Higher Education (HECPI)
• Research index
• Utilities
• Gas, electric, oil
• Compensation benchmarks
• Faculty
• Technical staff
• These indices were applied to prior year
  base-line budget
• New program initiatives were added
• Remove nonrecurring items

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Zero-Base Budget Process

• Reassess resource allocations to programs /
  departments / centers
• Define the basic needs of resources to perform
  the program or department services
• Evaluation of each incremental element or cost of
  operation
• Position by position
• Service by service
• Each incremental resource unit is justified to
  mission and service delivery

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Mission Based Budgeting

• What is it comprised of?
• Instruction
• Student instruction
• Graduate research training
• Resident training
• Patient Care
• Clinical activities
• Hospital activities
• Research
• Sponsored research
• Institutionally funded research

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Mission Based Planning and Analysis

• Before MBB costing, department results were
  presented as follows

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Mission Based Planning and Analysis

• Now, department results can be viewed as...

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Discussion

• Participant Examples
• Use of Budget at Other Institutions
• What Worked and What Didnt?

Session 2 - Budgeting
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BREAK
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Part 3

• Overview CUMC Integrated Planning Approach

Session 2 - Budgeting
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Budget Cycle, Process, and Timeframe
Budget Development

Budget Review, Approval and Implementation
Budget Planning
Budget Monitoring, Tracking and Adjustments
Analysis of Final Results
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Budget Roles and Responsibilities
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CUMC Overall Budget Construction

• University budget arranged by sector in
  three-level hierarchy
• Top level Morningside, Medical Center,
  University Central Administration
• Morningside and Medical Center include
• 100 tuition revenue
• Gift and endowment income
• Grants and contracts generated by schools
• Departments and faculties
• Financial aid
• University Central Administration includes
• Central administrative offices
• Insurance and utilities
• Auxiliaries and Institutional Real Estate
• Athletics, libraries fees, work-study
• Income from unrestricted endowment

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CUMC Overall Budget Construction- FY04
School Revenues - every tub on its own bottom
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CUMC Overall Budget Construction

• CUMC Operating Budget Highlights
• Direct Revenue Budget
• Tuition and fees (5)
• Endowment and gifts (7)
• Sponsored grants and contracts (42)
• Faculty practice (32)
• Affiliated institutions (NYPH, St. Lukes, Harlem
  Hospital) (11)
• Licensing and patent revenue (1)
• Miscellaneous revenues (2)
• Direct Expense Budget
• Instruction and educational administration
  including NYPH (36)
• Faculty practice plan (29)
• Direct research expenses (22)
• Maintenance of plant and debt service (6)
• Other (7)
• PS financial performance is the primary driver
  of CUMCs overall finances (82)

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CUMCs Budget Methodology

• All funds are budgeted
• All accounts, both unrestricted and restricted,
  are budgeted at the ten digit level
• This includes both general ledger and subsidiary
  ledger accounts
• Proxy accounts are used to estimate prospective
  grant revenue
• Accounts are aggregated into management units
  (MUs)
• Management units are aggregated into departmental
  budget submissions (BUs)
• Departmental chairs, program directors, institute
  chairs are accountable for budget submission
• Budget submissions are aggregated into schools
• Schools are aggregated into CUMC budget
  submission
• CUMC budget is one of the three sectors that
  comprise the Columbia University budget
• CU budget is approved by the Trustees of Columbia
  University
• Operating Budgets should reflect revenues and
  expenses in a 12-month period which increase or
  reduce Current Funds

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CUMC Overall Budget Construction

• Statement of Activities (Revenue/Expense
  statement)
• COB Consolidated Operating Budget
• Summarizes all of the activity of the
  organization for the entire period.
• Depicts how the resources of the organization are
  used in providing programs or services in order
  to meet its mission
• Revenues (Sources)
• Expenses (Uses)
• Reported by natural or functional groupings
• Reports revenue and expenses at gross amount and
  surplus and deficit at net amount

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CUMC Overall Budget Construction

• Consolidated Operating Budget
• Includes all activities and accounting
  transactions that affect the sectors change in
  net assets to support current operations
• Affected by
• Direct revenues and expenses (practice revenues,
  sponsored projects revenue, employee
  compensation)
• Indirect sources and uses (internal allocations
  of cost and revenue)
• Non-operating activities (transfers of operating
  funds to and from long-term assets)
• The net of all three categories results in a
  change in current assets

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CUMC Overall Budget Construction

• Example of the COB
• Direct Revenue and Support XXXX
• Operating Transfers and Indirect Sources XXXX
• Grand Total Sources XXXX
• Direct Expenses XXXX
• Operating Transfers Out Indirect Uses XXXX
• Grand Total Uses XXXX
• Transfer From/To Non Operating Funds XXXX
• Net Change in Current Fund Balance XXXX

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CUMC Overall Budget Construction

• Principal Budget Assumptions
• A number of assumptions about the external
  economic environment and policy decisions are
  implicit in the budget process, including
• Tuition and Fees
• Each school proposes its own tuition and fee
  rates in its budget proposal
• (subject to trustee approval)
• Enrollment
• Approximately 4 of CUMCs total revenue comes
  from tuition and fees
• The 2004-05 tuition revenue budget depends upon
  total enrollment of 2900 full time equivalent
  students
• CUMC accounts for 11 of Universitys tuition
  revenue

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CUMC Overall Budget Construction

• Principal Budget Assumptions (continued)
• Sponsored Research Volume
• Consist of two components
• Direct research funding that is highly restricted
  to specific projects
• FA recovery (ICR) which is calculated based upon
  federal cost allocation methodologies
• Once received, FA recovery is unrestricted as to
  its use
• In total, sponsored projects almost equal to
  faculty practice
• FA recovery was approximately 100 million
• Research (funding from all sources direct and
  indirect) represents 1/3 of CUMCs overall budget

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CUMC Overall Budget Construction

• Principal Budget Assumptions (continued)
• Endowment Investment Returns
• The University's endowment spending rule aims to
  distribute 5.0 of the previous years beginning
  market value.
• By this measure, the 2004-05 base spending rate
  will be 5.1
• Spending Rule Driven by investment results and
  external market conditions
• Regulates the annual amounts made available from
  the endowment for support of University
  operations
• Balances current needs against the preservation
  of the purchasing power of the merged investment
  pool

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CUMC Overall Budget Construction

• Principal Budget Assumptions (continued)
• Medical Faculty Practice Plans
• Represents 37 (383 million) of activity
• 18 clinical departments
• Patient volume, payor mix, collection rate, etc
• Other Budget Assumptions
• Patent income
• Gifts
• Affiliation agreements
• Miscellaneous revenue
• Miscellaneous expenses
• Financial aid, utilities, rent, common costs
• New / Expanded Programs

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CUMC Overall Budget Construction

• Statistical Background CUMC Total June 2004

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CUMC Overall Budget Construction

• Risks Physicians and Surgeons
• PS is vulnerable to several budget issues in
  2004-05, notably
• The level of indirect cost recovery
• The ability to collect projected patient receipts
• The ability of operating units to absorb the
  costs of the new assessments
• To achieve budgeted central administrative cost
  savings
• Risks are mitigated by
• Fundraising and development potential
• Improvements as a result of better financial
  management policies and practice
• New research opportunities

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Part 4

• Developing Budgeting Metrics

Session 2 - Budgeting
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Goals and Objectives

• Metrics can be viewed at the Department, Division
  and individual physician level
• Budget expectations must be communicated and
  understood at the Department, Division and
  individual faculty level in order to establish a
  sense of accountability at each level.
• Practice productivity expectations should be
  communicated, both revenue and expense, with
  emphasis on patient volume and payor mix
  estimates.

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Planning Assumptions

• Estimated Grant Increase from Current Faculty
• What effect will the future federal budget
  deficits have on the increase of the NIH
  appropriation?
• What is CUMCs expectation of its market share of
  the NIH budget?
• Are there different assumptions for increases by
  the various research mix categories?
• NIH grants
• PHS training grants
• Clinical research

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Planning Assumptions

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Performance Metrics

• Variance Reporting Department / Account Drill
  Down Approach
• Where is the variance occurring?
• Department
• Division
• Faculty
• Is it a revenue variance?
• Volume
• Payor Mix
• Collection Effectiveness
• Is it an expense variance?
• Head count
• Salaries, including overtime
• OTPS
• Is it a profitability variance?
• Average revenue per procedure compared to average
  cost

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Clinical Example

• Typical revenue performance metrics include
• Revenue per FTE MD
• Volume indicator
• Procedure Codes
• Relative Value Units
• Average revenue per procedure
• Measure of collection effectiveness
• Days in Accounts Receivable or
• Bracket Creep increase in of receivable in
  older buckets
• What is the mix of inpatient, procedural and
  office services?
• What is your payor mix and average payment rates?
• Typical Expense Metrics include
• Non-MD salary expense as a of revenue
• All non-MD expense as a of revenue
• Average cost per procedure

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Discussion

• CUMC Financial Scorecard
• What are the key outcomes that evidence a
  successful MU / BU?
• What fiscal / administrative metrics would you
  place on a school or departmental scorecard?

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CUMC Financial Scorecard A Draft Proposal

• Change in Net Assets (COB)
• Reserve Summary
• Revenue Summary
• Tuition
• Patent Income
• Practice Revenue
• Sponsored Funding
• Direct MTDC spending
• FA (ICR)
• Training, research, service, financial aid
• Pipeline activity (applications, success rate,
  new expired grants)

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CUMC Financial Scorecard A Draft Proposal

• Expense Summary
• Utilities
• Faculty and Additional compensation
• Major equipment
• Unallowables
• Overdrafts
• Number of overdrafts, , Ledger
• Recurring overdrafts
• Affiliates
• Receivables
• Payables

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CUMC Financial Scorecard A Draft Proposal

• Employee
• Headcount
• Vacant positions
• Attendance performance
• Effort report verification
• Financial Aid
• Number, , eligible candidates
• Number of appeals
• Contingency balance
• Payroll suspense
• Unpaid vendor invoices
• Number, aged

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BREAK
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Part 5

• Multi-year Financial Planning

Session 2 - Budgeting
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Planning For Strategic Initiatives

• How should the organization leverage its assets
  to fund capital requirements?
• What is the extent of current cross-subsidization
  from patient care to teaching and research?
• What is the organizations marginal research
  revenue? - How is it measured?
• How should the financial model calculate FA?
  (MTDC?)
• What are the non-federal revenue assumptions?
• What is the magnitude of the fund raising
  campaign needed to support the organizations
  enterprise?

• Key Strategic Questions
• What is the current competitive position of the
  enterprise?
• What are the current clinical and educational
  initiatives?
• What types of bio-medical research should the
  organization be undertaking in 5 years? in 10
  years? In 15 years?
• Over the next 5 to 10 years, how much cash will
  be required to finance the investments?
• What will be the impact of potential funding
  needs for
• new program development?
• new technology?
• strategic affiliations / shared services?
• increased working capital requirements?
• operating cash reserves?

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Example

• Financial Planning Medical/Dental Facility

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SDOS Strategic Priority

• Established Community DentCare Network 1996
• Goals
• Provide patient-centered dental services to
  underserved populations in Northern Manhattan
• Offer improved framework for educating dental and
  other health professional students at CUMC
• Currently Includes
• Six school-based dental clinics
• Mobile dental van
• Linkages with community health centers
• Thelma Adair Community Health Center

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Case Example Select Points

• Community DentCare clinical research findings
  (1996-97) suggested that majority of elderly in
  central Harlem had unmet dental needs
• Community stakeholders recommended that any new
  facility targeted to seniors, include medical
  primary care services as well as dental
• Next step ? Feasibility analysis to construct
  state-of-the-art primary care facility in central
  Harlem secure financing

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Site Location
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Capital Project Budget

• Renovation of 5,050 Square ft
• 13 medical exam / dental operatories
• Financing
• Loan - Primary Care Development Corp (PCDC)
  2.04 m
• Grants (PCDC) 0.475 m
• CUMC .185 m
• TOTAL 2.7 million

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Feasibility Financial Models

• If we build it will they come? ? Demographic
  market analyses
• What does the multi-year financial plan show?
• best case
• middle case
• worst case
• What are the key assumptions in the financial
  model?

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Select Key Assumptions

• REVENUE
• Provider Mix Productivity
• Reimbursement rates payor mix
• Utilization and rate of ramp up
• EXPENSE
• Staffing Salaries
• OTS expenses (various methodologies)

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Payor Mix Assumptions
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Provider Assumptions
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Revenue Assumptions
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Staffing FTE Assumptions
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OTPS Assumptions
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Five-year plan based on assumptions
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Updating Multi-year Financial Plans

• Thelma C. Davidson Adair Clinic
• Opened June 2002
• Annual Budget 1.3 million
• Annual Visits 8,000

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Part 6

• Capital Planning and Budgeting

Session 2 - Budgeting
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What Is A Capital Plan?

• A management tool intended to assist schools in
  the overall management of projects and the
  capital assets that support their programs.
• A Capital Plan is a tool to assess the long-term
  capital project requirements of an entity and to
  establish funding of high-priority projects in a
  timely and cost-effective manner.
• A Capital Plan also promotes the provision of
  continuous efficient services. The written plan
  identifies and describes capital projects, the
  years in which funding each project is to occur
  and the method of funding.
• While a Capital Plan may be designed to forecast
  any period of time, it generally extends beyond
  the current operating cycle and usually covers a
  three to five year time frame.

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What Is A Capital Plan?

• Financial considerations include
• Availability of reserves
• Fund raising potential
• Impact on operating budget
• Borrowing vs. doing without
• Debt capacity
• Statutory limits
• Institutional policy
• Strength of revenue streams
• Bond rating
• Bank debt vs. public markets
• Tax-exempt securities

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Overview of Capital Planning Process at CU

• Universitys capital planning program addresses
  physical plant, including academic, research,
  recreational and administrative buildings, as
  well as utility systems, outdoor spaces and
  technical infrastructure
• Initiatives often require large investments that
  cannot be completely funded from current
  operating revenues or gifts
• Financing mechanisms are used to amortize the
  cost of a project over its useful life against
  future revenue streams
• Financing primarily comes from tax-exempt bonds,
  and commercial paper issued by DASNY (Dormitory
  Authority State of New York).
• The annual long-range budget planning process
  ensures that the repayment of all financial
  commitments is carefully integrated into the
  Universitys operating plan, including cash flow
  needs.
• The University currently has outstanding debt of
  1 billion and a AAA bond rating, the most
  favorable evaluation.

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Overview of Capital Planning Process at CU
Example

• Manhattanville expansion project
• The university's continued growth has
  necessitated the development of about 1 million
  square feet since 1994. There is not enough space
  available for development within the existing
  CUMC and Morningside campuses or through the
  development of nearby university-owned properties
  to sustain such a growth rate. Columbia has had
  facilities in Manhattanville for decades, where
  it has owned or leased about one-third of the
  area.
• Manhattanville, which consists of about 20 acres,
  is located between the Morningside campus and the
  uptown CUMC campus, extending roughly from West
  125th Street to 133rd Street and from Broadway to
  12th Avenue. The area, currently zoned for
  industrial use, is comprised of warehouses, car
  service stations and other industrial buildings.
  The economically depressed area has experienced
  an employment decline of more than 40 percent
  since 1984.

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Overview of Capital Planning Process at CU

• 2003-04 was the final year of a five-year
  capital improvement program.
• An early step in the capital planning process for
  developing the next plan was an assessment of
  capital conditions and financing needs across all
  campuses and sectors of the University
• The plan will also benefit from a campus
  expansion study conducted by two preeminent urban
  architectural and planning firms, the Renzo Piano
  Building Workshop and Skidmore Owings and
  Merrill.

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CU Prior 5-Year Plan Ending 2003-04

• Total spending of 1.375 billion
• Sources
• External financing 38
• Gifts Grants 13
• School / Department 25
• Endowment 7
• Other Internal Sources 17
• Uses
• Housing 16
• Academic / Research Programs 44
• IRE 9
• Technology 4
• Libraries 6
• Student Services 8
• Building Infrastructure 11
• Other 2

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Budgeting for Capital Spending

• 2004-05 Capital Budget
• Major planning sectors include
• Morningside 119 million
• Institutional Real Estate (IRE) 64
• Medical Center (CUMC) 66
• Manhattanville 80
• 329 million
• Funding sources
• Debt 176 million
• Gifts / Grants 20
• Reserves 76
• Temporary Reserves 47
• Other 10
• 329 million

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Capital Budget Approval Process at CU

• Capital projects include new construction,
  renovations, and infrastructure and information
  systems improvements with a total cost of gt 100K
  
• A Capital Project Document, detailing the scope
  of work, schedule, project cost, funding and
  operating budget impact is prepared (by
  Facilities Management at CUMC)
• Central University project approval may include
  the University Office of Management Budget, the
  EVP for Administration, Provost, University
  Planning and Budget Committee, and Trustees

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Capital Budget Approval Process at CU
Approvals required for proposed capital projects
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Capital Budget Approval Process at CU

• The 80 Rule
• At least 80 of the project cost must be in
  hand before a project is considered for approval
• In certain circumstances, design and planning
  aspects of a project can be approved even though
  the 80 funding threshold has not been reached.
• Financing for projects that include fund raising
  can meet the 80 target through firm pledges.
• Projects that are funded through fund raising
  must include a contingency plan to address
  potential shortfalls.

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Capital Budget Approval Process at CU

• Projects are administered at CUMC by Facilities
  Management
• Guide planning and approval process
• Bid and negotiate contracts
• Assure compliance with codes, regulations
• Oversee construction, installation, etc.
• Pay vendors
• Capital costs are separately accounted for in FAS
  Ledger 7 Plant Fund accounts

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Part 7

• Capital Assets and Depreciation

Session 2 - Budgeting
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Valuing Capital Assets on the Universitys
Financial Statements

• FASB requires colleges and universities to
  recognize the cost of using up long-lived
  assets on their financial statements
• Depreciation is the gradual conversion of the
  cost of a capital asset into an expense, over the
  assets useful life
• Historical cost is depreciated, not market value
  or replacement cost
• By not including depreciation, the financial
  statements would understate the cost of doing
  business
• Along with preparing financial statements,
  depreciation is used to derive the
• FA sponsored project funding rate

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Depreciation At CU Example

• Constructed a 43 million building, including
  laboratory equipment
• Straight-line method

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CUs Capitalization Policy and Equipment Tagging

• Which assets are capitalized?
• Equipment items costing 2K or more, with a
  useful life 2 or more years
• Controller captures data via expense subcode
• Subcode 61XX Externally purchased
• Subcode 63XX Internally fabricated (requires
  prior approval)
• Certain equipment leases
• Physical plant projects costing more than 50K
  (Ledger 7)
• Equipment tagging
• Control
• Disposal
• Periodic inventory
• Includes clinical practice equipment
• Linked to depreciation process

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QUESTIONS?
Session 2 - Fundamentals of Budgeting
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COURSE EVALUATION

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Session 2
Session 2 - Fundamentals of Budgeting